Here's what has happened to the stock market in the past after the Fed cut rates at record highs

The Federal Reserve is widely anticipated to initiate a quarter-point interest rate cut in September, its first since December, occurring amidst the S&P 500's rally to consecutive record highs, driven by robust corporate earnings and expectations of lower rates. Despite the market's elevated levels, Goldman Sachs' historical analysis indicates that past instances of Fed rate cuts at or near market peaks have yielded generally positive forward returns, with a median S&P 500 one-year return of 8%. This performance profile is noted as not significantly different from periods when the Fed cuts rates and the market is not at record levels, suggesting a continued supportive backdrop for equities.

Analysis

The market is pricing in a high probability (87%) of a Federal Reserve interest rate cut in September, an event occurring within the unique context of the S&P 500 reaching consecutive record highs after a 30% rally from its April lows. This rally has been underpinned by solid corporate earnings and the prospect of monetary easing. According to analysis from Goldman Sachs, this scenario of the Fed cutting rates into a growth upswing, especially when combined with a structural tailwind like the AI capital expenditure surge, creates a fundamentally supportive backdrop for equities. Historical precedent addresses the key concern of whether a rate cut can be effective at a market peak. A Goldman Sachs study of nine such instances since 1990 found that while forward returns can be mixed, they are generally positive over a one-year horizon, with a median S&P 500 return of 8%. Critically, this performance is not significantly different from the 9% median return when the Fed cuts rates while the market is not at a record, suggesting that the current market high is not a historical impediment to further gains driven by monetary policy easing.

Key Decisions for Investors

• Investors should consider that historical data does not support the view that a market at all-time highs precludes further gains from a Fed easing cycle, with analysis pointing to a median one-year return of 8%.
• Given the positive backdrop for growth stocks from lower rates and the specific mention of an AI capex surge, consider maintaining or increasing exposure to technology and growth-oriented sectors.
• Be mindful that forward returns in these scenarios are described as 'mixed,' indicating potential for short-term volatility even if the one-year outlook is positive, so a disciplined approach to risk management remains prudent.
• Closely monitor upcoming corporate earnings reports, as the constructive outlook is predicated on the combination of a 'growth upswing' and monetary easing; any significant weakening in earnings could challenge the bullish thesis.